Why Energy is Catching the Market's Eye

By: Frank Holmes | Mon, Apr 21, 2014
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Over the last month the energy sector has outperformed the market, and as you can see in the chart below, has done so by 6.5 percent. Year-to-date the sector is beating the S&P 500 Index by over 3 percent.

In a spectacularly performing market during 2013, energy lacked some of the incredible performance seen throughout the other sectors, but recently it has turned up, catching the attention of the market yet again.

Energy Sector Rising

What's causing this sudden shift in relative strength?

As our Director of Research John Derrick describes in our recent video on the Periodic Table of Sector Returns, it is not unusual to see sectors move from top to bottom from one year to the next. For example, energy ranked as one of the top-performing sectors from 2004 through 2007, but quickly lost momentum in 2008 when it was hit the hardest after the financial crisis. In 2012 and 2013 energy turned in some solid numbers, but lagged in comparison to the other sectors.

Periodic Table of Sector Returns

In looking at an overview of market performance, it's important to recognize what caused the moves. For example, one reason the energy sector is climbing back up, could be due to the broader market rotation that we've noticed recently, from growth stocks to value stocks.

Growth stocks are generally successful companies that are expected to continue growing their earnings, usually at a rate that outpaces the market, causing investors to pay more for them. Value stocks rarely outpace the market as much as growth stocks do. Investors see potential in buying these cheaper names, ones that trade at lower price-to-earnings (P/E) ratios than the S&P average, because they still have the potential to significantly outperform over time.

Pacific Rbiales Energy Logo

As I mentioned, in the past few weeks high-growth names have pulled back, while value names are steadily gaining momentum. One of the main reasons for this rotation is that some investors view the valuations of growth names as too high, especially in comparison to the value companies.

What's significant is that many of these value names happen to be in the energy sector. We've taken advantage of this shift to value in our Global Resources Fund (PSPFX) through names like Pacific Rubiales and Valero Energy.

Although this rotation is important to the recent moves in energy, it is not the only factor driving the sector up. Take a look at the price of oil and natural gas.

Currently natural gas prices are starting to stabilize while the price of West Texas Intermediate (WTI) crude oil is up by 4 percent year-to-date, reaching $104 a barrel just last week. This price increase in WTI is linked to concerns over future supply, but nevertheless higher oil prices bode well for stocks within the energy sector.

According to the Energy Information Administration (EIA), short-term projections for the price of WTI remain relatively high. Additionally, the group commented that, "Aside from seasonal issues, the EIA expects strong crude oil production growth, primarily concentrated in the Bakken, Eagle Ford, and Permian regions, continuing through 2015. Forecast production increases from an estimated 7.4 million barrels per day in 2013 to 8.4 million barrels per day in 2014 and 9.1 million barrels per day in 2015." This projection is good for North American producers and service companies.

Frank exploring energy opportunities in Albania

So how can you gain entry into this energy opportunity?

The portfolio managers and I continue to stay focused on companies that show robust fundamentals and are located in sectors showing strength. Currently, within our Global Resources Fund (PSPFX), we are capturing the latest takeoff in the energy sector through our exposure to companies that are reasonably valued. In addition to the two I mentioned previously, if you look at the fund's top 10 holdings you will also see our investments in large-cap names like Schlumberger Ltd, EOG Resources and Halliburton Co.

Are you ready to energize your portfolio? I believe a well-diversified portfolio includes exposure to natural resources. In fact, I was just in Tirana, the capital city of Albania, where I have had the opportunity to expand my tacit knowledge by visiting several resource companies.

I am excited to share my journey with you this week when I return home!

 


 

Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Copyright © 2010-2014 Frank Holmes

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
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